At Wealth Enhancement Group, financial education has always been a priority and a commitment to our clients and the community. This article summarizes the details of the recent legislation. If you have questions about how these changes impact you personally, we are offering a complimentary 2011 tax planning review for those who are interested.

On December 17, 2010, President Barack Obama signed into law The Reid-McConnell Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. The Act is the result of a compromise struck between President Obama and Republican leaders of the Senate and House of Representatives to temporarily extend unemployment benefits, reduce Social Security taxes, extend the “Bush Tax Cuts,” and make a host of other tax changes.

The Act now extends most of the provisions of two separate tax relief laws, which were set to expire, until the end of 2012. It offers citizens a variety of benefits, primarily in the areas of estate tax and individual income tax.

Individual Income Tax Rates
As part of the Bush Tax Cuts extension, the Act extended the expiration date on income tax rates by an additional two years. The current income tax rates (top federal income tax bracket is 35% and the lowest income tax bracket is 10%) will remain the same for the next two years.

By keeping the rates unchanged, 2010 Roth conversions are more valuable. Individuals can opt for the two-year deferral and no additional costs are incurred.

Long-term capital gains and dividend tax rates stay at 15% if your taxable income is in the 25% tax bracket or higher, or 0% if your taxable income is in the 15% tax bracket or lower.

Estate Tax
Under the new tax revisions, the estate tax rates are simply shortened by the Act at the top marginal rate of 35%. The brackets between 18% and 34% remain exactly the same, and the 35% bracket is imposed as the maximum rate.

The exemption amount has been raised to $5 million per person or $10 million per couple. Exemptions are portable between couples. This amount is indexed for inflation in multiples of $10,000 beginning in 2012. Starting January 1, 2013, the applicable exemption amount will revert back to $1 million as it was scheduled to do under previous legislation. The $5 million exemption amount is also applicable to gift taxes and the generation-skipping transfer tax.

As a result, more Roth IRAs and traditional IRAs will pass estate tax-free, and inherited Roth IRAs will be not only income tax-free but also estate tax-free.

Charitable Contributions
Required minimum distributions (RMD) that have not been met in 2010 can still be taken and allocated as a donation to a specific charity until the end of January 2011. If one does not want to donate the IRA distribution to charity, then the 2010 RMD must be taken by year-end as usual. If it is not timely taken, the 50% penalty on the amount not taken will apply.

The Bottom Line
There are plenty of provisions to the Tax Relief Act, including the extension of charitable IRA distributions and land conservation easements, and these changes provide many tax planning opportunities for individuals.

It is important to remember that the Act is essentially a two-year patch to prevent economic damage from tax provisions that are expiring at an inconvenient time. This will all have to be revisited in two years, when the political party balance in Washington may be very different than it is today.

The national tax provisions can be complicated. At Wealth Enhancement Group, our knowledgeable team of specialists can help you better understand the changes and use them for your long-term financial success.

Review your overall investment allocation and consider rebalancing as necessary. In conjunction with rebalancing, take some time to re-evaluate the amount of volatility or risk that is acceptable to your situation. Some considerations when evaluating your level of risk tolerance are your age, time horizon & proximity to retirement, cash flow needs, net worth, and investment objective. And, if you haven’t already, structure investments appropriately into short-term, mid-term and long term buckets; making sure you have a smart place from which to draw money should you need it.

Review account beneficiary forms to confirm that you have a named primary and contingent beneficiary that reflects your wishes. Discuss and review your estate planning documents, such as your Wills, Trusts, Health Care Directives, and Durable Powers of Attorney with your Attorney to confirm that the documents you currently have in place take full advantage of the current estate tax laws and that they accurately reflect your wishes. If you have not yet established these documents, consider meeting with an Attorney to discuss whether they are appropriate for your situation. Be sure to advise your heirs and executor where your estate planning and account documentation can be found in case of death or incapacitation.

Review your current property/casualty, life, disability and long term care insurance coverage with your Financial Advisor and other insurance advisor(s) to determine if you are properly insured.

Organize year-end financial statements and 2010 tax documents as you receive them. Also, be sure to destroy old documentation that is no longer needed in a safe manner.

Review your credit report annually. The law requires the major national consumer reporting bureaus to provide you with a free credit report each year upon request.

If you have incurred inefficient debt, one method of eliminating it is to transfer the debt to your home equity. Many people are reluctant to use their home equity to consolidate other debt. This reluctance really stems from a mind-set that is behind the times. Certainly, 30 years ago, if people refinanced their home or took out a second mortgage, you can be sure the neighbors were talking behind their backs about their financial woes. But using your home’s equity is economically wise. It provides low interest rates, a tax deduction, and an extended amortization.

However, even this form of debt should not be used recklessly. Defaulting on a mortgage of any kind has greater consequences than defaulting on consumer loans. Mortgage loans are secured by your home, which means that if you can’t make payments, you will lose your home. Consumer credit lenders cannot take such drastic remedies.

Avoid all other kinds of debt, including the high-risk debt of stock margin purchases and stock and commodity options. Leave those investments to the professional gamblers. Otherwise, buy only what you can pay for with cash.

Trusts are vehicles that can help shelter your assets from taxation and manage the property that you leave to your heirs. Simply put, you transfer property in the name of a trustee who manages it for the benefit of a third party, the beneficiary. One of the great advantages of trusts in their flexibility. They can be adapted to fit a wide variety of situations. In fact, as our attorneys at Wealth Enhancement Group say, “Trust is not the key word. Trust doesn’t tell you that much.”

What precedes the word trust tells you everything. The most important aspect of trusts is that they allow property to be managed according to the donor’s specific wishes, far into the future. Living trusts allow you to control trust assets; irrevocable trusts take away control but offer many attractive estate tax implications and more. Your advisers can help you determine which type of trust best suits your situation

As the snow melts away and the grass begins to green, many of us start our “spring cleaning” projects around the house. It is also a great time to clean up, organize, and review your financial affairs. Consider these six suggestions:

Review account beneficiary forms to confirm that you have a named primary and a contingent beneficiary that reflect your wishes.
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Discuss with your attorney and review your estate planning documents, such as your will, trusts, health care directives, and durable powers of attorney to confirm that the documents you have in place take full advantage of current estate tax laws. If you have not yet prepared these documents, consider meeting with an attorney to discuss whether they are appropriate for your situation. Be sure to advise your heirs and executor where your estate planning and account documentation can be found in case of your death or incapacitation.
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Review your current property/casualty, life, disability, and long-term care insurance coverage with your wealth manager and other insurance advisor(s) to determine if you are properly insured.
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Review contributions to employer retirement plans. The maximum contribution in 2010 to a 401(k), 403(b) or 457 plan is $16,500, and taxpayers age 50 and older may make “catch-up” contributions of $5,500. The maximum contribution to a SIMPLE Plan in 2010 is $11,500 with a “catch-up” contribution of $2,500 for taxpayers age 50 and older.
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Review contributions to traditional and Roth IRAs. The maximum contribution, if you qualify, is $5,000 in 2010 and taxpayers age 50 and older may make “catch-up” contributions of $1,000.
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Review your overall investment allocation and consider rebalancing as necessary. Contact a Wealth Enhancement Group advisor to discuss these and other opportunities that may exist.

Most of us don’t want to think about the time when we won’t be around anymore for our loved ones and our loved ones certainly don’t want to think about when we won’t be around for them either. While difficult to do, it is highly recommended that you share your estate plan and financial plan with those who will be responsible for, and perhaps even the beneficiaries of your estate when you do pass on. If you have not created an estate plan or financial plan yet, it may be helpful, with the guidance of a qualified financial adviser, to help facilitate that discussion so that all options are considered. Some of the most well-executed estate plans have come with complete discussions with the entire family to get all of the issues out now while they can still be addressed, instead of after the fact when no changes can be made.

In having these discussions, it is also important to note where important documents such as wills and insurance policies can be found. It would be helpful to create a list of all bank, investment, retirement, and insurance accounts and their beneficiaries as well. Remember that any account, such as an IRA, generally has a designated beneficiary. Any account with a beneficiary designation does not pass through your will, but rather to who is listed as beneficiary on the account. Your will and beneficiary forms can be entirely different, and perhaps not even listing who you might like to receive a particular asset. There are even significant tax benefits in naming certain individuals or entities beneficiaries as well.

Planning is the only way to make sense of the five things you can do with money. If you don’t plan, you will likely spend more, save less, invest less, and do nothing to reduce your taxes.

Don’t sell yourself short by planning your retirement based on some arbitrary percentage of your income. “Needs planning” is a good start for someone who has given no thought to retirement savings. It’s one way to convince people that they should save something, but it’s not good for people who want to do better than just get by. Don’t settle for mediocrity in your investment planning; try to excel. It’s fine to set a floor for what you will need, but then aim higher-and plan to get there! Become a “wants” planner, instead of a “needs” planner. Only when you determine what you want from life can you determine the role that money will play in helping you achieve your dreams.